The Quick Read: A home with no mortgage is still underwritten as a cash-out refinance, on both programs. FHA fits homeowners with thinner credit or tighter ratios who can live with ongoing mortgage insurance. Conventional fits homeowners with stronger credit who want to avoid that insurance. At the leverage cap, the two reach about the same share of value on a one-unit home, so the choice comes down to credit, ratios, and how long you will keep the loan.
Why a Paid-Off Home Is Still “Cash-Out”
Owning your home outright does not make the new loan a plain refinance. There is no old loan to pay off, so every dollar of the new loan, after costs, ends up in your hands. That is cash-out by definition.
Agencies treat it the same way. HUD’s Handbook 4000.1 describes a cash-out refinance as one where no mortgage previously existed. Fannie Mae’s Selling Guide allows a new first mortgage on a property with no lien.
Two practical consequences follow. First, you cannot ask for “no-cash-out” treatment to get friendlier terms. Second, your housing payment goes from zero to a full mortgage payment, with taxes and insurance. That payment shock is the most underrated part of this decision.
Side-by-Side
| Factor | FHA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Max leverage (1-unit home) | 80% LTV | 80% LTV |
| Units, owner-occupied | 1 to 4 | 1 unit 80%, 2-4 units 75% |
| Credit floor | Generally more forgiving | Generally higher |
| Mortgage insurance | Upfront 1.75% plus annual | None at these LTVs |
| Occupancy history | Owned and lived in 12 months | Six months on title |
| Documentation | Full doc, appraisal, automated approval | Full doc, appraisal |
| Debt ratios | Base 31/43; up to 40/50 with factors | Automated finding; reserves if DTI high |
| Loan limits | County limits apply | Conforming limits apply |
Program details vary by lender and borrower profile. The wholesale programs Lendmire places FHA loans with set the credit floor at a 580 decision score for FHA purchases, and cash-out files are reviewed at the lender’s own standard. Everything here is subject to lender guidelines and full file review.
When FHA Cash-Out Is the Better Fit
FHA tends to win when the file has a soft spot that conventional pricing punishes. That can mean a credit score in the low range, a debt load that runs high, or a recent credit event. HUD’s waiting periods apply after a chapter 7 discharge (two years) or a foreclosure (three years). Those are HUD’s rules, not a promise about any one lender’s file.
Ratios matter here too. The base FHA pair is 31/43 (housing over total). With documented compensating factors, files can reach 40/50 at the top tier. If you carry car loans and cards you plan to pay off with the proceeds, FHA’s flexibility on ratios can be the difference. Lendmire’s piece FHA Cash-Out vs Conventional Cash-Out for a Homeowner With a High DTI walks through that case.
The price of that flexibility is mortgage insurance. FHA charges an upfront premium of 1.75% of the base loan, usually financed into the balance. The annual premium runs between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. On a thirty-year loan above 90% LTV it lasts for the term. At or below 90% it ends after eleven years. At the 80% cash-out cap, that second path is the likely one.
Ownership history is the other test. FHA cash-out requires that you owned and lived in the home as your principal residence for 12 months before the case number is assigned. Inherited homes get an exception to the occupancy minimum, as long as the property was never treated as an investment. The FHA cash-out refinance program covers the full set of requirements.
When Conventional Cash-Out Is the Better Fit
Conventional wins when credit is strong and the equity is real. There is no mortgage insurance at these leverage levels, so the cost of the loan is not carrying an extra premium for as long as you hold it. Over a long holding period, that gap can add up. Over a short one, it may not matter.
Ownership rules are lighter. Fannie Mae’s Selling Guide asks that at least one borrower be on title for six months before the new loan disburses. It also names exceptions: an inherited home or one awarded in a divorce has no waiting period. A recent all-cash purchase can use delayed financing if the original purchase was arm’s-length and the funds are documented. If you are weighing FHA instead, confirm whether any comparable exception applies to your situation before relying on one.
The conventional file has its own friction points:
- Reserves of six months are required on automated files with a DTI above 45%.
- A home that was listed for sale must be off the market on or before disbursement.
- Pricing adjustments for lower credit scores can erase the insurance advantage.
Lendmire’s article Conventional Cash-Out vs FHA Cash-Out for Dropping FHA Mortgage Insurance covers the exit side of this choice, which matters if you start in FHA and later want out.
Leverage: The Part People Get Wrong
Both programs top out at 80% of appraised value on a one-unit principal residence. HUD cut FHA’s cash-out cap to 80% through Mortgagee Letter 2019-11. Some pages still imply FHA lets you borrow more. That is stale. Fannie Mae’s Eligibility Matrix shows the same 80% for a one-unit home, and 75% for two to four units.
Also, 80% of value is not 80% in cash. The upfront FHA premium, closing costs, and any required payoffs come out of the amount you receive. With nothing to pay off, the net is closer to the cap, but not equal to it.
Appraised value drives everything. A low appraisal shrinks the proceeds on either program. Ask for the appraisal reconsideration process early if the number comes in light.
A Quick Decision Path
Run through these in order:
1. Credit. Strong credit and ratios point to conventional. Credit that is thin, or ratios that run high, point to FHA.
2. Time horizon. A long hold favors conventional, since FHA’s annual premium keeps running. A short hold narrows the gap.
3. Ownership clock. Owned and occupied 12 months? FHA is open. On title six months, or inherited? Conventional may be open sooner.
4. Property. A two-to-four unit home lives at a lower cap on conventional.
5. What the cash is for. Paying off higher-cost debt can justify either loan. A cash use with no clear return deserves a second look.
Risks to Weigh Before Borrowing Against a Paid-Off Home
The home now secures a debt. Research from the Consumer Financial Protection Bureau notes that converting non-mortgage debt into mortgage debt can put the home at risk of foreclosure if payments become unsustainable. Unsecured debt rarely carries that risk.
Alternatives exist. A home equity loan or HELOC leaves no first lien to replace, which is a real option when you owe nothing. A cash-out refinance replaces the first lien outright. Some states also have special cash-out rules, so state law can change what a lender can offer.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Cash-out refinance: A new first mortgage that gives you cash from your equity, including on a home with no existing loan.
LTV (loan-to-value): The loan amount divided by the home’s appraised value.
Seasoning: The minimum time you must have owned, or lived in, the home before the loan.
Mortgage insurance premium: FHA’s upfront and annual charge that protects the lender, paid by the borrower.
Delayed financing: A conventional exception that lets a recent cash buyer borrow before the usual six-month wait.
Frequently Asked Questions
Can I do an FHA cash-out refinance if I own my home outright?
Yes, if you meet the ownership and occupancy tests. You must have owned and lived in the home as your principal residence for 12 months before the case number is assigned, with the loan capped at 80% of value. It is treated as cash-out, since no mortgage exists to pay off.
Which is cheaper with good credit?
Conventional usually costs less over a long hold, because it carries no mortgage insurance at these leverage levels. Credit-based pricing adjustments can narrow the gap. Compare the Loan Estimates from several lenders to see the real difference.
Which is easier with bruised credit?
FHA tends to be easier, because its credit and ratio standards are more flexible. The wholesale programs Lendmire works with start at a 580 decision score for FHA purchases, and cash-out files are reviewed on the lender’s own standard. HUD’s waiting periods apply after a bankruptcy or foreclosure.
How long must I have owned the home?
For FHA, 12 months of ownership and occupancy before the case number. For conventional, at least one borrower on title for six months, with exceptions for inheritance, divorce awards, and delayed financing after a documented cash purchase.
Does a Loan Estimate mean I’m approved?
No. The CFPB explains that it shows estimated costs and terms after you apply, but it is not an approval. Comparing estimates from multiple lenders is the smart use of it.
What to Do Next
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches. Program terms are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. HUD Handbook 4000.1 update transmittal
2. Fannie Mae Selling Guide B2-1.3-03
3. HUD Handbook 4000.1 transmittal (ML 2019-11)
4. Fannie Mae Eligibility Matrix
5. CFPB: What is a Loan Estimate?
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: FHA Cash-Out vs Conventional Cash-Out When You Already Have an FHA Loan · FHA Cash-Out Refinance Documentation for a Locked-in Homeowner · Should a Texas Homestead Owner Choose FHA Cash-Out or Conventional?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.